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Civil Resource Manual

206. Priority for the Payment of Claims Due the Government

The federal priority statute, 31 U.S.C. § 3713,[FN1] provides that, when a debtor of the United States is insolvent and not in bankruptcy, it must pay its debts to the government first before paying any other creditor. Its purpose is "to secure adequate public revenues to sustain the public burden," United States v. State Bank of North Carolina, 31 U.S. 29, 35 (1832), and it is to be construed liberally in order to effectuate that purpose. United States v. Emory, 314 U.S. 423 (1941); Bramwell v. U.S. Fidelity & Guaranty Co., supra. Specifically, the statute provides:

FN1. This statute was previously codified at 31 U.S.C. §§ 191 and 192. The revision of the statute has not changed the intent or meaning of the law. See In re Metzger, 709 F.2d 32 (9th Cir. 1983).
(a)(1) A claim of the United States government shall be paid first when:
(A) a person indebted to the government is insolvent; and
(i) the debtor without enough property to pay all debts makes a voluntary assignment of property;
(ii) property of the debtor, if absent, is attached; or
(iii) an act of bankruptcy is committed; or
(B) the estate of a deceased debtor, in the custody of the executor or administrator, is not enough to pay all debts of the debtor.
(2) This subsection does not apply to a case under title 11.
(b) A representative of a person or an estate (except a trustee acting under title 11) paying any part of a debt of the person or estate before paying a claim of the government is liable to the extent of the payment for unpaid claims of the government.
The Priority Statute applies to all claims of the United States. Bramwell v. United States Fidelity Co., 269 U.S. 483, 487 (1926) (U.S. deposit of funds on behalf of Indians). Some of the claims to which priority applies are enumerated in Mass. v. United States, 333 U.S. 611, 625-26 n. 24 (1948). Debts payable in the future are also covered by the statute. United States v. State Bank, 31 U.S. 29, 35-36 (1832) (bonds to be paid at a future date); In re Metzger, supra (criminal fines). The priority statute attaches whether or not the government also holds a lien on property of the debtor. See United States v. Vermont, 377 U.S. 351, 357-58 (1964). The statute applies even though the government's claim has not yet progressed to judgment. United States v. Moore, 423 U.S. 77, 80-83 (1975) (statute does not distinguish between liquidated and unliquidated claims; "the courts have applied the priority statute to government claims of all types."); United States v. Gilbert Associates, Inc., 345 U.S. 361 (1953) (municipal tax lien subordinate to federal priority claim for taxes where municipal lien was only a general unperfected lien on all of debtor's property); United States v. Moriarity, 8 F.3d 329, 334 (6th Cir. 1993) ("claim" in priority statute interpreted expansively to include right of payment whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured.)

The method of acquisition of a claim is immaterial, and includes claims acquired by the United States through assignment. Lakeshore Apartments, Inc. v. United States, 351 F.2d 349, 353 (9th Cir. 1965). Nor does it matter that the government's loan which gave rise to a claim was made in participation with a private bank. Small Business Administration v. McClellan, 364 U.S. 446 (1960).

For purposes of § 3713(a)(1)(A)(iii), acts of bankruptcy include the following (see Bankruptcy Act, § 3, 11 U.S.C. § 21 (1976)):

a. making a preferential payment to a creditor on an antecedent debt, United States v. Whitney, 654 F.2d 607 (9th Cir. 1981); Lakeshore Apartments, Inc. v. United States, supra;
b. committing a fraudulent conveyance, United States v. Mr. Hamburg Bronx Corp., 228 F. Supp. 115 (S.D.N.Y. 1964);
c. concealing assets with an intent to hinder, delay or defraud creditors;
d. permitting a creditor to obtain judicial lien on property;
e. making a general assignment for the benefit of creditors; or,
f. permitting a receiver or trustee to be appointed over all property;
Whether a secured creditor is subject to the priority statute may depend on whether its secured lien is sufficiently perfected and specific to except it from the broad reach of § 3713. The Supreme Court espouses a stringent standard that requires the lienor actually to take title to, or possession of, the property to be exempt from § 3713. United States v. State of Vermont, supra; Cardinal Construction Co. v. Besmec, Inc., 701 F. Supp. 1274, 1280-81 (S.D.W. Va. 1988); Nesbitt v. United States, 445 F. Supp. 824, 830-31 (N.D. Cal. 1978), aff'd, 622 F.2d 433 (9th Cir. 1980), cert. denied, 451 U.S. 984 (1981). The Court explained:
In claims of this type 'specificity' requires that the lien be attached to certain property by reducing it to possession, on the theory that the United States has no claim against property no longer in the possession of the debtor.

United States v. State of Vermont, supra, at 353 quoting from United States v. Gilbert Associates, 345 U.S. 361, 363-65 (1953).